DMC-WSU Lose Residency Tax War.....For now

[ DMC = Detroit Medical Center
WSU = Wayne State University ]

For quite some time, the issue of whether medical residents in US are students or workers for tax purporses, has been a bone of contention between residency programs and the Internal Renenue Service (IRS), like I had alluded before when I shared an image of my first residency payslip.

The fight revolves around the 'FICA' TAX. There are four basic types of taxes that will be paid on your residency paychecks:

1. Federal Income Tax
2. State Income Tax (Not in all states)
3. Medicare Tax
4. Social Security Taxes

Medicare + Social Security taxes together makeup the so-called FICA tax (FICA= Federal Income Contributions Act). Both the resident (employee) and the residency program (employer) pay the FICA tax per resident, to a total of 7.65% each on gross income, so that total would be 15.3% extracted in equal halves from the employer and the employee. (A self employed person pays both employer+employee part, FICA tax would be 15%.).

Students are exempt from paying FICA taxes, called the 'Student exemption' ! (IMGs on Student visas and OPT would already know this )

After losing tax battles to a few programs, the IRS got a little cheeky by tightening the definition of "Student exemption" in 2004. It ruled that anyone working more than 40 hours a week cannot be a student, and that anyone in a residency program cannot be a student and hence effectively blocked all programs from requesting back money. But, courts have overruled that since and it is upto the residency program to prove that their residents are indeed students and not workers.

DMC-WSU claim was that residency pays were not wages, but scholarships or fellowship stidents, which they could not effective prove in court against the IRS. Hence their next plan should be to show that their residents are students who get trained, that everything they do is a part of training and that they have daily lectures, morning reports, and other didactics to that effect.

My residency program is trying for the same and has hired its own lawyer. So how much will not paying FICA affect your take-home pay as resident ? Lets see: In my three years of Internal Medicine residency, my Total Taxable income would be:

46,200 + 48,200 + 49,200 = $143,600

7.65% of $143,600 is that is $10,985.4 ....which is not a small amount as a resident !

The same amount will be saved by the residency program per resident ! So savings for the program could be anywhere from tens of thousands to millions depending on the number of residents, like the Mayo prorgam at Minnesota won 1.6 Million in tax paybacks in 2007, and with Detroit Medical Center + Wayne State University employing 500 Medical residents....that's clearly a lot at stake :-)

This PDF file on the American Medical Association Website makes a good concise read on the issue and advice to programs...

Read the DMC-Wayne State Univ Story here